Turkcell Iletisim Hizmetleri: First Quarter 2019 Results

“Strong Start to the Year and Targets Raised”

ISTANBUL–(BUSINESS WIRE)–Turkcell Iletisim Hizmetleri (NYSE:TKC) (BIST:TCELL):

• Please note that all financial data is consolidated and comprises that of Turkcell Iletisim Hizmetleri A.S. (the “Company”, or “Turkcell”) and its subsidiaries and associates (together referred to as the “Group”), unless otherwise stated.
• We have three reporting segments:
  • “Turkcell Turkey” which comprises all of our telecom related businesses in Turkey (as used in our previous releases in periods prior to Q115, this term covered only the mobile businesses). All non-financial data presented in this press release is unconsolidated and comprises Turkcell Turkey only figures, unless otherwise stated. The terms “we”, “us”, and “our” in this press release refer only to Turkcell Turkey, except in discussions of financial data, where such terms refer to the Group, and except where context otherwise requires.
  • “Turkcell International” which comprises all of our telecom related businesses outside of Turkey.
  • “Other subsidiaries” which is mainly comprised of our information and entertainment services, call center business revenues, financial services revenues and inter-business eliminations. Turkcell Ödeme ve Elektronik Para Hizmetleri A.Ş., our subsidiary responsible for payment services, was previously reported under Turkcell Turkey but with effect from the first quarter of 2019 is now included in “Other Subsidiaries”. We made this change due to the fact that its non-group revenues, which are not telco related, and consumer finance business related revenues now comprise the majority of its total revenues. All figures presented in this document for prior periods have been restated to reflect this change.
• In this press release, a year-on-year comparison of our key indicators is provided, and figures in parentheses following the operational and financial results for March 31, 2019 refer to the same item as at March 31, 2018. For further details, please refer to our consolidated financial statements and notes as at and for March 31, 2019, which can be accessed via our website in the investor relations section (www.turkcell.com.tr).
• Selected financial information presented in this press release for the first and fourth quarters of 2018 and the first quarter of 2019 is based on IFRS figures in TRY terms unless otherwise stated.
• In accordance with our strategic approach and IFRS requirements, Fintur is classified as ‘held for sale’ and reported as discontinued operations as of October 2016. Certain operating data that we previously presented with Fintur included has been restated without Fintur.
• In the tables used in this press release totals may not foot due to rounding differences. The same applies to the calculations in the text.
• Year-on-year and quarter-on-quarter percentage comparisons appearing in this press release reflect mathematical calculation.

FINANCIAL HIGHLIGHTS

FIRST QUARTER HIGHLIGHTS

• Strong set of financials:
  • Group revenues of TRY5,675 million, up 19.2% year-on-year
  • Group EBITDA of TRY2,281 million, with an EBITDA margin of 40.2%
  • Positive quarterly trend in EBITDA margin, up 0.4pp for the Group and up 2.2pp for Turkcell Turkey
  • Group net income of TRY1,224 million on strong operating performance, disciplined financial risk management and contribution of Fintur sale
• Solid operational performance:
  • Mobile ARPU² growth of 13.4% year-on-year, like-for-like ARPU³ growth of 19.6%
  • Residential fiber ARPU growth of 12.3% year-on-year
  • Digital services downloads reached 178 million
  • Mobile multiplay subscriber ratio⁴ reached 68.6%, up 9.9pp year-on-year; multiplay with TV subscribers⁵ reached 49.5%, up 3.8pp year-on-year
  • Data usage of 4.5G users at 7.8GB in March
• The transfer of our stake in Fintur to Sonera Holding B.V. was completed. The final transaction value was EUR352.9 million. TRY772.4 million profit was generated from the transaction.
• Restructuring of the sales organization enables us to closely focus on customer needs and respond with more effective services and solutions.
• We revise our guidance⁶ for 2019. Accordingly, we now target revenue growth of 17%-19% up from 16%-18% and an EBITDA margin of 38%-40% compared to 37%-40% previously. We maintain our target operational capex over sales ratio⁷ of 16%-18%.

(1) EBITDA is a non-GAAP financial measure. See page 13 for the explanation of how we calculate Adjusted EBITDA and its reconciliation to net income.
(2) Excluding M2M
(3) The ARPU of customers who have stayed with Turkcell for at least 14 months
(4) Share of mobile voice line users which excludes subscribers who have not used their line in the last 3 months. Multiplay refers to mobile customers who use voice, data and one of core digital services.
(5) Multiplay subscribers with TV: Fiber internet + IPTV users & fiber internet + IPTV + fixed voice users
(6) Please note that this paragraph contains forward looking statements based on our current estimates and expectations regarding market conditions for each of our different businesses. No assurance can be given that actual results will be consistent with such estimates and expectations. For a discussion of factors that may affect our results, see our Annual Report on Form 20-F for 2018 filed with U.S. Securities and Exchange Commission, and in particular, the risk factor section therein
(7) Excluding license fee
For further details, please refer to our consolidated financial statements and notes as at and for March 31, 2019 which can be accessed via our website in the investor relations section (www.turkcell.com.tr).

COMMENTS BY MURAT ERKAN, CEO

Economic fragility has prevailed in the emerging markets in the first quarter of 2019. Regardless, as Turkcell Group, we have delivered robust results on the back of our solid business model built on strong pillars. Our consolidated revenues grew yearly by 19.2% to TRY5.7 billion with an EBITDA¹ of TRY2.3 billion, resulting in an EBITDA margin of 40.2%. Including the TRY772 million profit generated from the Fintur transaction, we reported TRY1.2 billion net income, 1.4 times higher than for the same period of last year. Accordingly, we revise our full-year guidance² for 2019 upwards to 17% – 19% for revenue growth and 38% – 40% for the EBITDA margin. In addition to our solid financial performance, our leverage ratio has declined to 1.3x with the contribution of the Fintur transaction, and we expect it to further decline over the coming periods.

Demand for mobile data has remained strong this quarter with the contribution of our digital services. Monthly average data consumption of customers on our 4.5G network has increased 28% yearly to 7.4GB. Total downloads of our digital services reached 178 million, while we have continued efforts to increase the time spent on these services. In the fixed segment, Superbox, our Fixed Wireless Access (FWA) product providing fiber-like speeds at locations not covered by our fiber network, has earned customer appreciation, reaching 56 thousand subscribers. Our capability to provide the Superbox service for the first time in Turkey through our wide frequency and strong infrastructure has also proven our readiness for 5G.

As Turkcell, with our “customer first” motto we continue to contribute to our people and our country.

We marked our twenty-fifth anniversary in February. Over the past 25 years, Turkcell has transformed from a conventional telco into the world’s first digital operator. We have developed digital services; and what’s more, we export technology. Following the one signed with Moldcell, we have also signed cooperation agreements with ALBtelecom of Albania, CG Corp Global of Nepal and Digicel Group of the Caribbean to allow the use of our digital services. Our customer-focused approach, which we have always pursued in achieving this success, will only gain strength in the upcoming periods as we contribute to their lives with new smart technologies. In this new era, we aim to strengthen our emotional ties with our customers and have redesigned our sales organization accordingly. We now have a structure enabling us to focus on customer needs more closely, and design more effective services and solutions.

We have three strategic focus areas.

We believe we can sustain profitable growth with a strategic focus on three key areas: Our digital services, digital business solutions and our techfin platform. While continuing to work on increasing the usage of our locally-developed digital services, we plan to establish new commercial partnerships for digital exports, the destinations of which today number 38 countries. We will serve the digital transformation of both private and public sectors through Digital Business Solutions, our new subsidiary. The digitization of financial services, which in our view offers great potential, as well as other new opportunities in this field form the third focus area.

We continue our efforts towards a shared infrastructure.

As we offer our services through a strong mobile and fixed infrastructure, we continue to work towards accomplishing a shared infrastructure; one that best serves the interests primarily of our country, but also of all parties involved. In this context, we already provide fixed broadband to additional households through bilateral agreements with Türksat and Vodafone Turkey. Regarding the next phase, we believe in the necessity of joint investments into infrastructure to position Turkey’s communication infrastructure among the best in the world. We particularly perceive the importance of joint infrastructure in the era of 5G, which will serve as the platform for Industry 4.0.

We are determined to pioneer Turkey’s technological advancement.

In April, we hosted the technology summit, which coinciding with our 25^th anniversary, was particularly significant. The latest advances, particularly of locally manufactured technologies formed the agenda of the summit in its 10^th year. The summit hosted over 70 opinion and business leaders in around 30 sessions where 5G, artificial intelligence, Industry 4.0, smart technologies, entrepreneurship, cyber security, robotics and cloud technologies were the key topics of discussion. Over 10,000 attendees in person witnessed the introduction of our locally-developed AI-powered personal assistant “Yaani Assistant”.

We will continue to serve our country and people through our investments.

Turkcell has accomplished its pioneering role in the technological transformation of Turkey with its well-established infrastructure. We have been the fastest growing telco globally on the back of our services and solutions developed for our customers over the past three years. We own a strong mobile network operating over the widest frequency in Turkey. We have laid 43 thousand km of fiber and built eight data centers, enabling us to provide high-quality services. For this, we have already invested TRY50 billion in our technological infrastructure over the past 25 years, and going forward we will continue our investments.

We will announce our 3-year targets in New York.

We have seen a strong start to 2019 and have revised our full-year targets upwards. Accordingly, we are scheduled to announce our 3-year targets on October 31, 2019 in New York at the Turkcell Capital Markets Day.

We thank all our colleagues for the part they have played in our success, along with our Board of Directors for their unyielding trust and support. We also express our gratitude to our customers and business partners, who have remained with us throughout our success story.

(1) EBITDA is a non-GAAP financial measure. See page 13 for the explanation of how we calculate Adjusted EBITDA and its reconciliation to net income.
(2) Please note that this paragraph contains forward looking statements based on our current estimates and expectations regarding market conditions for each of our different businesses. No assurance can be given that actual results will be consistent with such estimates and expectations. For a discussion of factors that may affect our results, see our Annual Report on Form 20-F for 2018 filed with U.S. Securities and Exchange Commission, and in particular, the risk factor section therein

FINANCIAL AND OPERATIONAL REVIEW

Financial Review of Turkcell Group

(1) Excluding depreciation and amortization expenses.
(2) EBITDA is a non-GAAP financial measure. See page 13 for the explanation of how we calculate Adjusted EBITDA and its reconciliation to net income.
(3) EBIT is a non-GAAP financial measure and is equal to EBITDA minus depreciation and amortization expenses.
(4) Fair value loss and interest expense in relation to derivative instruments reported under finance cost were netted off from respective fair value gain and interest income in relation to derivative instruments reported under finance income. Historical periods were restated to reflect this change.

Revenue of the Group rose 19.2% year-on-year in Q119. This was driven mainly by growth in Turkcell Turkey revenues on the back of successful execution of digital services focused strategy and upsell performance.

Turkcell Turkey revenues, at 85% of Group revenues, increased 18.7% to TRY4,833 million (TRY4,072 million).

• Data and digital services revenues rose by 18.1% to TRY3,215 million (TRY2,722 million).
  • Higher number of data users, increased data consumption per user, rise in 4.5G smartphone penetration as well as the rise in penetration of digital services were the main drivers of growth on the mobile front.
  • Larger fiber subscriber base, price adjustments and upsell efforts, as well as the increased ratio of multiplay subscribers with TV, were the main drivers of growth on the fixed front.
• Wholesale revenues rose by 38.9% to TRY232 million (TRY167 million) due to increased carrier traffic and the positive impact of currency movements.

Turkcell International revenues, comprising 7% of Group revenues, grew by 52.0% to TRY425 million (TRY279 million), resulting mainly from the rise in lifecell and BeST revenues.

Other subsidiaries’ revenues, at 7% of Group revenues, and which includes information and entertainment services, call center revenues and revenues from financial services were at TRY417 million (TRY410 million).

• Please note that we completed the sale of our shares in Azerinteltek, our sports betting business in Azerbaijan, as of January 11, 2019. As we received the transfer of proceeds on December 27, 2018 and transferred the control of the subsidiary, we did not report any revenues in Q119 in relation to Azerinteltek operations.
• Our consumer finance company’s revenues grew by 14.1% to TRY242 million (TRY212 million). Revenue growth was impacted by the decline in consumer loan portfolio from TRY4.4 billion as of Q118 to TRY3.6 billion as of Q119 due to the installment limitation on consumer loans for telecom devices.
• Turkcell Ödeme ve Elektronik Para Hizmetleri A.Ş., our subsidiary responsible for payment services, was previously reported under Turkcell Turkey but with effect from the first quarter of 2019 is now included in “Other Subsidiaries”. We made this change due to the fact that its non-group revenues, which are not telco related, and consumer finance business related revenues now comprise the majority of its total revenues. All figures presented in this document for prior periods have been restated to reflect this change.

Cost of revenue (excluding depreciation and amortization) increased to 48.1% (44.8%) as a percentage of revenues in Q119. This was mainly due to the rise in cost of goods sold (4.6pp), despite the decline in other cost items (1.3pp) as a percentage of revenues.

Administrative expenses were at 3.4% (3.2%) as a percentage of revenues in Q119.

Selling and marketing expenses declined to 7.1% (7.5%) as a percentage of revenues in Q119. This was mainly due to the decline in selling expenses (0.7pp), despite the rise in other cost items (0.3pp) as a percentage of revenues.

Net impairment loses on financial and contract assets were at TRY70 million (TRY 94 million) in Q119.

EBITDA¹ rose by 12.8% year-on-year in Q119, leading to an EBITDA margin of 40.2% (42.5%).

• Turkcell Turkey’s EBITDA grew by 9.7% to TRY1,910 million (TRY1,741 million) resulting in an EBITDA margin of 39.5% (42.8%). Turkcell Turkey’s EBITDA margin improved by 2.2pp compared to Q418 (37.3%).
• Turkcell International EBITDA² increased to TRY194 million (TRY93 million) with an EBITDA margin of 45.6% (33.2%).
• The EBITDA of other subsidiaries was at TRY178 million (TRY188 million).

(1) EBITDA is a non-GAAP financial measure. See page 13 for the explanation of how we calculate adjusted EBITDA and its reconciliation to net income.

(2) We started to capitalize the frequency usage fees of lifecell in Q418 in accordance with IFRS16 which led to a positive impact on Turkcell International EBITDA. The change was implemented retrospectively; impact regarding previous quarters of 2018 was booked in Q418.

Depreciation and amortization expenses increased by 20.2% in Q119.

Net finance expense increased to TRY420 million (TRY313 million) in Q119, mainly due to the higher interest expense of loans. Please note that the Group started to apply hedge accounting as of July 1, 2018 for existing participating cross currency swap and cross currency swap transactions, in accordance with the IFRS 9 hedge accounting requirement. Please see the IFRS report for details.

See Appendix A for details of net foreign exchange gain and loss.

Income tax expense declined 6.1% year-on-year in Q119. Please see Appendix A for details.

Net income of the Group rose to TRY1,224 million (TRY501 million) in Q119, mainly driven by strong operating performance, disciplined financial risk management and contribution of the Fintur sale, which had a positive impact of TRY772 million.

Total cash & debt: Consolidated cash as of March 31, 2019 increased to TRY8,888 million from TRY7,419 million as of December 31, 2018. Excluding the FX swap transactions for TRY borrowing, 79% of our cash is in US$ and 21% is in EUR.

Consolidated debt as of March 31, 2019 increased to TRY22,867 million from TRY20,156 million as of December 31, 2018. Please note that TRY1,410 million of our consolidated debt is comprised of lease obligations resulting from the implementation of IFRS 16.

• Consolidated debt breakdown excluding lease obligations resulting from the implementation of IFRS 16:
  • Turkcell Turkey’s debt balance was TRY16,771 million, of which TRY9,727 million (US$1,728 million) was denominated in US$, TRY6,299 million (EUR997 million) in EUR, TRY214 million (CNY257 million) in CNY and the remaining TRY531 million in TRY.
  • The debt balance of lifecell was TRY1,071 million all denominated in UAH.
  • Our consumer finance company had a debt balance of TRY3,610 million, of which TRY1,759 million (US$312 million) was denominated in US$, and TRY1,077 million (EUR170 million) in EUR with the remaining TRY774 million in TRY.

• TRY705 million of IFRS 16 lease obligations is denominated in TRY, TRY39 million (US$7 million) in US$, TRY178 million (EUR28 million) in EUR and the remaining balance in other local currencies (please note that the figures in parentheses refer to US$ or EUR equivalents).

TRY13,342 million of our consolidated debt is set at a floating rate. Excluding the consumer finance business borrowings, TRY5,048 million of consolidated debt will mature within less than a year.

Net debt as of March 31, 2019 was at TRY13,979 million. Including the proceeds of the Fintur deal of EUR352.9 million (equivalent of TRY2,230 million as of March 31, 2019), which is booked under due from related parties, net debt was TRY11,749 with a net debt to EBITDA ratio of 1.3 times. Excluding consumer finance company consumer loans, our telco only net debt was at TRY8,108 million with a leverage of 0.9 times.

Turkcell Group has a long FX position of US$216 million as at the end of Q119. (Please note that this figure takes into account advance payments and hedging but excludes FX swap transactions for TL borrowing. Derivatives (VIOP) and forward transactions are included).

Capital expenditures: Capital expenditures, including non-operational items, amounted to TRY1,352.6 million in Q119. In Q119, operational capital expenditures (excluding license fees) at the Group level were at 15.6% of total revenues.

(1) Breakdown of capex for Q118 has been restated.

Operational Review of Turkcell Turkey

(1) Superbox subscribers are included in mobile subscribers.
(2) Presentation of churn figures has been changed to demonstrate average monthly churn figures for the respective quarters.
(3) In Q117, our churn policy was revised to extend from 9 months to 12 months (the period at the end of which we disconnect prepaid subscribers who have not topped up above TRY10).

Contacts

Turkcell
Investor Relations
Korhan Bilek, Tel: + 90 212 313 1888
[email protected]

Corporate Communications:
Tel: + 90 212 313 2321
[email protected]

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